The principle of monetary neutrality implies that an increase in the money supply will
A)increase real GDP and the price level.
B)increase real GDP,but not the price level.
C)increase the price level,but not real GDP.
D)increase neither the price level nor real GDP.

Question

Quizplus · Accepted Answer

The principle of monetary neutrality suggests that changes in the money supply only affect nominal variables, such as prices and wages, but have no real effects on output, employment, or other real variables. Therefore, an increase in the money supply will lead to an increase in the price level, but not real GDP. Option A implies that monetary policy can stimulate real GDP growth, which is inconsistent with the neutrality of money principle. Option B is also incorrect because an increase in the money supply would lead to an increase in both nominal GDP and the price level, not just real GDP. Option D is incorrect because an increase in the money supply will have some effect on nominal variables, even if it is not translated into real variables.

The Principle of Monetary Neutrality Implies That an Increase in the Money